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Critical Accounting Estimates
The Group prepares its Consolidated Financial Statements in accordance with IFRS
as issued by the International Accounting Standards Board and IFRS as adopted
by the European Union, the application of which often requires judgements to
be made by management when formulating the Group’s financial position and
results. Under IFRS, the directors are required to adopt those accounting policies
most appropriate to the Group’s circumstances for the purpose of presenting fairly
the Group’s financial position, financial performance and cash flows.
In determining and applying accounting policies, judgement is often required
in respect of items where the choice of specific policy, accounting estimate or
assumption to be followed could materially affect the reported results or net
asset position of the Group should it later be determined that a different choice
would be more appropriate.
Management considers the accounting estimates and assumptions discussed
below to be its critical accounting estimates and, accordingly, provides an
explanation of each below.
The discussion below should also be read in conjunction with the Group’s
disclosure of significant IFRS accounting policies, which is provided in note 2
to the Consolidated Financial Statements, “Significant accounting policies”.
Management has discussed its critical accounting estimates and associated
disclosures with the Company’s Audit Committee.
Impairment reviews
Asset recoverability is an area involving management judgement, requiring
assessment as to whether the carrying value of assets can be supported by the
net present value of future cash flows derived from such assets using cash flow
projections which have been discounted at an appropriate rate. In calculating
the net present value of the future cash flows, certain assumptions are required
to be made in respect of highly uncertain matters, as noted below.
IFRS requires management to undertake an annual test for impairment of
indefinite lived assets and, for finite lived assets, to test for impairment if events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Group management currently undertakes an annual impairment
test covering goodwill and other indefinite lived assets and also reviews finite
lived assets and investments in associated undertakings at least annually to
consider whether a full impairment review is required.
Assumptions
There are a number of assumptions and estimates involved in calculating the net
present value of future cash flows from the Group’s businesses, including
management’s expectations of:
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•
•
•
•
growth in EBITDA, calculated as adjusted operating profit before depreciation
and amortisation;
timing and quantum of future capital expenditure;
uncertainty of future technological developments;
long term growth rates; and
the selection of discount rates to reflect the risks involved.
The Group prepares and internally approves formal ten year plans for its
businesses and uses these as the basis for its impairment reviews. Management
uses the initial five years of the plans, except in markets which are forecast to
grow ahead of the long term growth rate for the market. In such cases, further
years will be used until the forecast growth rate trends towards the long term
growth rate, up to a maximum of ten years.
For mobile businesses where the first five years of the ten year management plan
are used for the Group’s value in use calculations, a long term growth rate into
perpetuity has been determined as the lower of:
•
•
the nominal GDP rates for the country of operation; and
the long term compound annual growth rate in EBITDA in years six to ten of the
management plan.
For mobile businesses where the full ten year management plans are used for
the Group’s value in use calculations, a long term growth rate into perpetuity has
been determined as the lower of:
•
•
the nominal GDP rates for the country of operation; and
the compound annual growth rate in EBITDA in years nine to ten of the
management plan.
For non-mobile businesses, no growth is expected beyond management’s plans
for the initial five year period.
Changing the assumptions selected by management, in particular the discount
rate and growth rate assumptions used in the cash flow projections, could
significantly affect the Group’s impairment evaluation and, hence, results.
The Group’s review includes the key assumptions related to sensitivity in the cash
flow projections.
The following changes to the assumptions used in the impairment review would
have led to an impairment loss being recognised in the year ended 31 March 2008:
Increase Decrease
by 2% by 2%
£bn £bn
Discount rate 0.3 –
Budgeted EBITDA (1) – 0.2
Capital expenditure (2) – –
Long term growth rate – –
Notes:
(1) Represents the compound annual growth rate for the initial five years of the Group’s approved
financial plans.
(2) Represents capital expenditure as a percentage of revenue in the initial five years of the
Group’s approved plans.
Business combinations
Goodwill only arises in business combinations. The amount of goodwill initially
recognised is dependent on the allocation of the purchase price to the fair value
of the identifiable assets acquired and the liabilities assumed. The determination
of the fair value of the assets and liabilities is based, to a considerable extent,
on management’s judgement.
Allocation of the purchase price affects the results of the Group as finite lived
intangible assets are amortised, whereas indefinite lived intangible assets, including
goodwill, are not amortised and could result in differing amortisation charges
based on the allocation to indefinite lived and finite lived intangible assets.
On the acquisition of mobile network operators, the identifiable intangible
assets may include licences, customer bases and brands. The fair value of these
assets is determined by discounting estimated future net cash flows generated
by the asset, assuming no active market for the assets exist. The use of different
assumptions for the expectations of future cash flows and the discount rate
would change the valuation of the intangible assets.
Vodafone Group Plc Annual Report 2008 85